<PAGE> 

================================================================================

                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                      __________________________________


(MARK ONE)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     FOR THE QUARTER ENDED SEPTEMBER 30, 1996


                                      OR


[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     FOR THE TRANSITION PERIOD FROM _____________  TO ________________
     COMMISSION FILE NUMBER 1-10877


                         TERRA NITROGEN COMPANY, L.P.
            (Exact name of registrant as specified in its charter)


           DELAWARE                                      73-1389684
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


   5100 EAST SKELLY DRIVE, SUITE 800
           TULSA, OKLAHOMA                                 74135
(Address of principal executive office)                  (Zip Code)


                        REGISTRANT'S TELEPHONE NUMBER:
                                 (918) 660-0050


AT THE CLOSE OF BUSINESS ON NOVEMBER 1, 1996, THERE WERE 13,636,364 SENIOR
PREFERENCE UNITS OUTSTANDING.


     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. 
  X   YES        NO
-----      -----

================================================================================
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                         TERRA NITROGEN COMPANY, L.P.
                         CONSOLIDATED BALANCE SHEETS
                               (IN THOUSANDS)
<TABLE> 
<CAPTION> 
                                               SEPTEMBER 30,   DECEMBER 31,   SEPTEMBER 30,
                                                   1996            1995           1995
                                               -------------   ------------   -------------
                                                (UNAUDITED)                    (UNAUDITED)
<S>                                            <C>             <C>            <C> 
ASSETS
  Current assets:
     Cash and cash equivalents                    $ 54,546       $ 71,490       $ 43,019
     Accounts receivable                             8,546         28,426         41,912
     Inventory - finished products                  12,007         12,201         15,162
     Inventory - materials and supplies             17,078          9,882          9,529
     Prepaid expenses                                3,643          6,001          5,604
                                                  --------       --------       --------
   Total current assets                             95,820        128,000        115,226


  Net property, plant and equipment                172,827        177,358        174,196


  Distribution reserve fund                         18,480         18,480         18,480
  Other assets                                      14,285         14,285          9,188
                                                  --------       --------       --------

   Total assets                                   $301,412       $338,123       $317,090
                                                  ========       ========       ========

LIABILITIES AND PARTNERS' CAPITAL


  Current liabilities:
     Accounts payable and accrued liabilities     $ 34,396       $ 29,488       $ 24,136
     Customer prepayments                            2,462         15,517          3,437
     Current portion of long-term debt               1,285          1,504          1,356
                                                  --------       --------       --------
    Total current liabilities                       38,143         46,509         28,929

  Long-term debt and capital
     lease obligations                               3,585          4,198          4,907
  Other long-term obligations                        1,060          1,060          1,060
  Partners' capital                                258,624        286,356        282,194
                                                  --------       --------       --------

    Total liabilities and partners' capital       $301,412       $338,123       $317,090
                                                  ========       ========       ========
</TABLE> 

See accompanying notes.
<PAGE>
 
                         TERRA NITROGEN COMPANY, L.P.
                       CONSOLIDATED STATEMENTS OF INCOME
                                 (UNAUDITED)
                   (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE> 
<CAPTION> 
                                                    Three Months Ended             Nine Months Ended
                                                       September 30,                  September 30,
                                               ----------------------------   -----------------------------
                                                   1996            1995           1996            1995
                                               -------------   ------------   -------------   -------------
<S>                                            <C>             <C>            <C>             <C>
Revenues                                          $81,961        $85,285         $277,463        $279,311
Other income                                          296            189              480             411
                                                  -------        -------         --------        --------
Total revenues                                     82,257         85,474          277,943         279,722

Cost of goods sold                                 44,572         45,608          129,495         137,526
                                                  -------        -------         --------        --------

Gross profit                                       37,685         39,866          148,448         142,196
Operating expenses                                 (2,799)        (3,748)          (9,156)        (13,604)
                                                  -------        -------         --------        --------

Operating income                                   34,886         36,118          139,292         128,592

Interest expense                                     (465)          (158)            (711)         (1,602)
Interest income                                     1,462          1,151            4,982           3,672
                                                  -------        -------         --------        --------

Net income                                        $35,883        $37,111         $143,563        $130,662
                                                  =======        =======         ========        ========

Net income allocable to
 limited partners' interest                       $24,595        $27,195         $ 94,654        $ 96,678
                                                  =======        =======         ========        ========

Net income per limited
 partnership unit                                 $  1.31        $  1.45         $   5.03        $   5.14
                                                  =======        =======         ========        ========
</TABLE> 
<PAGE>
 
                         TERRA NITROGEN COMPANY, L.P.
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (UNAUDITED)
                               (IN THOUSANDS)
<TABLE> 
<CAPTION> 
                                                       Nine Months Ended
                                                         September 30,               
                                                  ----------------------------
                                                      1996            1995                  
                                                  -------------   ------------                     
<S>                                               <C>             <C>                
OPERATING ACTIVITIES:

  Net income                                         $143,563       $130,662                 
  Adjustments to reconcile net income to net cash                                          
    provided by operating activities:                                                          
      Depreciation and amortization                     8,526          8,222                  
      Amortization of deferred finance fees                29             27                
      Changes in operating assets and liabilities:                                         
        Receivables                                    19,880        (13,851)                 
        Inventories                                    (1,512)         5,338                 
        Prepaid expenses                                2,358           (374)                  
        Accounts payable, accrued liabilities and      
         customer prepayments                         (13,637)       (10,868)                  
        Other                                           1,748            124                   
                                                     ========       ========                     
NET CASH PROVIDED BY OPERATING ACTIVITIES             160,955        119,280

NET CASH USED IN INVESTING ACTIVITIES:

  Capital expenditures                                 (5,771)        (3,339)                    

FINANCING ACTIVITIES:

  Repayment of long-term debt                            (832)       (36,187)                               
  Partnership distributions                          (171,296)       (85,347)                     
                                                     --------       --------                   
NET CASH USED IN FINANCING ACTIVITIES                (172,128)      (121,534)                    
                                                     --------       -------- 
NET DECREASE IN CASH AND CASH EQUIVALENTS             (16,944)        (5,593)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD       71,490         48,612                      
                                                     --------       --------                      
CASH AND CASH EQUIVALENTS AT END OF PERIOD           $ 54,546       $ 43,019                  
                                                     ========       ========                     
</TABLE> 

See accompanying notes.

<PAGE>

                            TERRA NITROGEN COMPANY, L.P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.   Basis of Presentation

     The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Terra Nitrogen Company, L.P. ("TNCLP") Annual Report on Form
10-K for the year ended December 31, 1995.  TNCLP and its operating partnership
subsidiary, Terra Nitrogen, Limited Partnership (the "Operating Partnership"),
are referred to herein, collectively, as the "Partnership".

     The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for the fair
statement of the results for the periods presented.  All of these adjustments
are of a normal and recurring nature.  Results for the quarter are not
necessarily indicative of future financial results of the Partnership.  The
prior years' financial statements have been reclassified to conform to current
year presentation.

     Net income per limited partnership unit is computed by dividing net
income, less a 34% and 26% share allocable to the General Partner for the nine
months ended September 30, 1996 and 1995, respectively, by 18,808,778 limited
partner units, composed of 13,636,364 Senior Preference Units ("SPUs")
(6,000,000 Junior Preference Units automatically became SPUs on December 31,
1995, pursuant to the terms of the Agreement of Limited Partnership of TNCLP),
and 5,172,414 Common Units.  The net income allocated to the General Partner
increased to 34% during the nine months ended September 30, 1996 due to the
increase in Available Cash distributed to the General Partner.  According to
the Agreement of Limited Partnership of TNCLP, net income is allocated to the
General Partner and the Limited Partners in each taxable year in the same
proportion that Available Cash for such taxable year was distributed to the
General Partner and the Limited Partners. Distributions of Available Cash are
made 98% to the Limited Partners and 2% to the General Partner, except that the
General Partner is entitled, as an incentive, to larger percentage interests to
the extent that distributions of Available Cash exceed specified target levels
that are significantly above the Minimum Quarterly Distribution ("MQD") of
$.605 per quarter per unit.  Available Cash for the nine months ended September
30, 1996 increased $55.7 million over the nine months ended September 30, 1995
due primarily to the reduction in 1995 Available Cash as a result of the
repayment of its $35 million term loan out of  cash flow from operations during
the 1995 period, and an increase in 1996 Available Cash as a result of the
impact of TNCLP's participation in an accounts receivable securitization
facility (see Note 7) entered into during the third quarter of 1996 and due to
higher net income in 1996.

2.   Distributions to Unitholders

     The Partnership makes quarterly cash distributions to Unitholders and the
General Partner in an amount equal to 100% of its Available Cash (as this and
other capitalized terms are defined in the Partnership Agreement).  In
addition, a Reserve Amount equal to $18.5 million has been previously funded to
support
 

<PAGE> 

distributions of the MQD on the SPUs. At September 30, 1996, the Reserve Amount
remained fully funded. During the Preference Period, ending December 31, 1996,
Senior Preference and Common Units participate equally in cash distributions
after each class of Units has received the MQD subject to the General Partner's
right to receive cash distributions.

     The quarterly cash distributions declared on the Units and to the General
Partner applicable to 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                      Senior Preference Units         Common Units              General Partner
                     -------------------------  -------------------------  -------------------------  
                     Total ($000s)  $ Per Unit  Total ($000s)  $ Per Unit  Total ($000s)  $ Per Unit
                     -------------  ----------  -------------  ----------  -------------  ----------
<S>                  <C>            <C>         <C>            <C>         <C>            <C>
1996:
   First Quarter         22,227         1.63         8,431         1.63        13,022         --
   Second Quarter        33,000         2.42        12,517         2.42        27,883         --
   Third Quarter         24,136         1.77         9,155         1.77        15,685         --
 
1995:
   First Quarter         15,545         1.14         5,897         1.14         3,795         --
   Second Quarter        23,591         1.73         8,948         1.73        14,904         --
   Third Quarter         20,045         1.47         7,603         1.47         9,995         --
   Fourth Quarter        26,045         1.91         9,879         1.91        18,290         --
</TABLE>

3.   Cash and cash equivalents

      The Partnership has a demand deposit with an affiliate that represents
excess Partnership cash deposited with Terra Capital, Inc., the parent of the
General Partner.  The deposit is due on demand and at September 30, 1996 the
interest rate of 6.2% was based on the cost rate as calculated under the
accounts receivable sale agreement.  The amount of the demand deposit included
in cash and cash equivalents was $37.9 million at September 30, 1996.

4.   Conversion of SPUs

     Pursuant to the provisions of the Agreement of Limited Partnership of
TNCLP, the Preference Period for TNCLP will end on December 31, 1996.  At the
end of the Preference Period, for a 90-day period commencing on the date the
General Partner mails notice to the Senior Preference Unitholders that the
Senior Conversion Date (the last day of the Preference Period) has occurred,
the holders of all SPUs will have the right, subject to satisfaction of
exchange listing requirements, to elect to convert their SPUs into Common Units
on a one-for-one basis, effective as of the Senior Conversion Date, by
delivering to the General Partner a conversion notice.  Any SPUs for which a
conversion notice is not received during such 90-day period will remain SPUs.
Those units that remain SPUs and do not convert into Common Units will continue
to be entitled to the MQD, but will not participate with the Common Units in
any additional distributions.

     After the Preference Period, the Reserve Amount will be maintained only to
support distributions on any remaining SPUs.  The Reserve Amount will be
maintained in the amount of the lesser of (1) $18.5 million or (2) the amount
equal to four quarters of MQDs on all SPUs outstanding.

<PAGE>
5.   Redemption of SPUs                                                         
                                                                                
     After the Preference Period, any or all of the SPUs may be redeemed at the
option of the Partnership, exercised in the sole discretion of the General
Partner, upon at least 30 but not more than 60 days' notice at a price equal to
Unrecovered Capital plus accrued arrearages, if any. Unrecovered Capital, as
further defined in the Partnership Agreement, means an amount equal to the
excess of (i) the initial public offering price per SPU ($21.50) over (ii) the
sum of all distributions made in respect of an SPU out of Available Cash
constituting Cash from Interim Capital Transactions. If after giving effect to
an anticipated redemption, fewer than 1.0 million SPUs would be held by non-
affiliates of the General Partner, the Partnership must redeem all such SPUs if
it redeems any SPUs.
                                                                                
6.   Natural gas costs                                                          
                                                                                
     The Partnership's natural gas procurement policy is to effectively fix or
cap the unit cost of approximately 40-80% of its natural gas requirements for
the upcoming 12 months and up to 50% of its natural gas requirements for the
subsequent two-year period using supply contracts, financial derivatives and
other forward pricing techniques to gain some protection against natural gas
price increases on the spot market. These contracts are based on a designated
price, which price is referenced to market natural gas prices or appropriate
NYMEX futures contract prices. The Partnership frequently uses prices at the
Henry Hub in Louisiana as the index price. Natural gas supplies for the
Partnership's two production facilities are purchased from various suppliers for
each plant location. This creates a location basis differential between the
contract price and the physical price of natural gas. Accordingly, the use of
financial derivatives may more than offset the change in the price of physical
gas.
                                                                                
     As of September 30, 1996, the Partnership had effectively fixed or capped
the price of a substantial portion of its natural gas requirements for 1996,
1997 and 1998, consistent with its policy mentioned above. As a result of such
policies, the Partnership has reduced the potential adverse financial impact of
natural gas price increases during the forward pricing period, but conversely,
if natural gas prices were to fall, the Partnership may incur costs above the
spot market price as a result of such policies. The Partnership has entered into
firm contracts to minimize the risk of interruption or curtailment of natural
gas supplies. Unrealized gains from forward pricing positions totaled $11.3
million as of September 30, 1996. As of September 30, 1995, unrealized losses
from forward pricing positions totaled $4.0 million.
                                                                                
     For the nine months ended September 30, 1996, natural gas hedging
activities produced cost savings of approximately $28.4 million. Conversely, for
the comparable 1995 period, natural gas hedging increased cost by approximately
$15.1 million.

<PAGE>

7.   Accounts Receivable Securitization                                         
                                                                                
     On August 20, 1996, TNCLP and certain affiliates of the General Partner,
through Terra Funding Corporation ("TFC"), an affiliate of the General Partner
and a limited purpose corporation, entered into an agreement with a large
financial institution to sell an undivided interest in its accounts receivable.
Undivided interests in new receivables may be sold as amounts are collected on
previously sold interests. The discount on the accounts receivable sold is
included in interest expense in the Consolidated Statements of Income.
                                                                                
8.   New accounting standards                                                   
                                                                                
     In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which establishes accounting standards for such
assets. The Partnership adopted SFAS No. 121 effective January 1, 1996 and there
was no material impact on the Partnership's consolidated financial position or
results of operations.
                                                                                
     In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extingushments
of Liabilities", which establishes accounting and reporting standards for such
transfers. The Partnership will adopt SFAS No. 125 effective January 1, 1997.
Management does not expect that there will be a material impact on the
Partnership's consolidated financial position or results of operations.

<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND        
         RESULTS OF OPERATIONS
                                                                                
RESULTS OF OPERATIONS
                                                                                
THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED WITH THE THREE MONTHS ENDED     
SEPTEMBER 30, 1995                                                              
                                                                                
Volumes and prices for the three month periods ended September 30, 1996 and     
1995 were as follows:

<TABLE>
<CAPTION>
                                  1996                             1995         
                       -------------------------        ------------------------
                           Sales       Average              Sales       Average 
                          Volumes    Unit Price            Volumes    Unit Price
                         (000 tons)    ($/ton)            (000 tons)    ($/ton) 
                       -------------------------        ------------------------
<S>                         <C>          <C>                 <C>          <C>
Ammonia                     104          164                 123          173   
UAN                         585           85                 460           92
Urea                         94          160                 132          165

</TABLE>
                                                                                
     Revenues for the quarter ended September 30, 1996 declined $3.2 million, or
4%, compared with the quarter ended September 30, 1995 primarily due to lower
sales prices. Sales prices for all products were down between 3% and 7% compared
with the prior year quarter. In addition, sales volumes for urea and ammonia
decreased 29% and 15%, respectively, while UAN volumes increased 27% compared
with the same period in 1995. Urea and ammonia sales volumes declined primarily
due to a turnaround performed at the Blytheville Plant and reduced shipments for
wheat pre-plant application during the third quarter of 1996. UAN sales volumes
increased due to the late spring planting season that continued into the third
quarter and due to increased fall dealer demand.
                                                                                
     Cost of goods sold as a percentage of revenues was 54% for the 1996
quarter, a slight increase from the third quarter of 1995 as the lower nitrogen
sales prices were offset by lower natural gas costs. While spot natural gas
prices were approximately 56% higher during the third quarter of 1996 compared
with the same period in 1995, the Partnership's gas procurement activities,
which include forward pricing techniques, decreased its overall cost of natural
gas by 4% compared with the 1995 quarter. During the third quarter of 1996, the
Partnership realized gains on forward pricing transactions of $5.7 million
compared with losses of $4.3 million recorded in the 1995 quarter.
                                                                                
     Operating expenses decreased $0.9 million, or 25%, compared with the 1995
quarter primarily due to lower data processing, legal, incentive compensation
and employee benefit expenses. In addition, severance and relocation expenses
were lower during the 1996 period.
                                                                                
     Interest expense increased $307,000 over the comparable 1995 period
primarily due to the discount on accounts receivable sold under the accounts
receivable securitization facility entered into during the third quarter of 1996
(see Note 7).

<PAGE>

     Interest income increased $311,000, or 27%, compared with the 1995 period  
due to higher levels of cash and short term investments.                        
                                                                                
                                                                                
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE NINE MONTHS ENDED        
SEPTEMBER 30, 1995                                                              
                                                                                
Volumes and prices for the nine month periods ended September 30, 1996 and 1995 
were as follows:                                                                

<TABLE>
<CAPTION>
                                 1996                            1995          
                       ------------------------        -------------------------
                          Sales       Average             Sales        Average 
                         Volumes    Unit Price           Volumes     Unit Price
                        (000 tons)    ($/ton)           (000 tons)     ($/ton) 
                       ------------------------        -------------------------
<S>                     <C>         <C>                 <C>          <C>       
Ammonia                     311        183                  327         206
UAN                       1,731         95                1,522          95
Urea                        312        180                  358          86 
</TABLE>                                                  
                                                                                
     Revenues for the nine months ended September 30, 1996 were virtually
unchanged from the comparable 1995 period as higher UAN sales volumes were
offset by lower sales prices and volumes for urea and ammonia. UAN sales volumes
increased 14% primarily due to an approximate 12% increase in corn acres planted
during 1996. The increase in planted acres was due in part to low grain
inventories, high grain prices and passage of the 1996 Farm Bill which ended
government acreage reduction and production control measures, allowing farmers
more flexibility in planting. In addition, demand for fall dealer requirements
occurred earlier in 1996 compared with the requirements for fall 1995. Erratic
weather patterns reduced ammonia and urea applications during the 1996 period.
Wet weather in parts of the corn belt during the 1996 planting season created
unfavorable conditions for ammonia application. The wet weather combined with
reduced demand for use in the manufacture of phosphate fertilizers and lower
industrial demand caused ammonia prices to decline approximately 11% from 1995.
Urea and ammonia sales volumes were also impacted by a scheduled turnaround
performed at the Blytheville Plant during the third quarter of 1996 and reduced
shipments for wheat pre-plant application during 1996.
                                                                                
     Cost of goods sold as a percentage of revenues decreased to 47% for the
1996 period from 49% for the 1995 period, despite slightly lower sales prices,
reflecting the favorable impact of the Partnership's natural gas procurement
activities. The Partnership's forward pricing activities decreased its overall
cost of natural gas by 26% compared with the 1995 period. Spot natural gas
prices were 45% higher during 1996 due to cold weather during the first quarter
of 1996 which caused spot natural gas prices to increase and remain high during
the second and third quarters as natural gas storage levels were replenished.
During 1996, the Partnership realized gains on natural gas forward pricing
transactions of $28.5 million.
                                                                                
     Operating expenses decreased $4.4 million, or 33%, compared with the nine
months ended September 30, 1995 as a result of severance payments made during
1995 versus none in 1996 and lower 1996 incentive

<PAGE>
compensation expenses due to changes in profit sharing plans. In addition, data
 processing, legal and employee benefit expenses were lower during 1996.

     Interest expense declined $891,000 in the nine months ended September 30,
1996, compared with the same period in 1995 primarily due to the repayment of
the Partnership's $35 million term loan during the second quarter of 1995.

     Interest income increased $1.3 million during 1996 due to higher levels of
cash and short-term investments.

     CAPITAL RESOURCES AND LIQUIDITY

     Net cash provided by operating activities for the first nine months of 1996
was $161.0 million, an increase of $41.7 million over the same period in 1995,
principally due to higher net income and the proceeds received from the accounts
receivable securitization program entered into during the third quarter of 1996.
The Partnership's principal needs for funds are for support of its working
capital, distributions to Partners and capital expenditures. The Partnership
intends to fund such needs primarily from net cash provided by operating
activities. At September 30, 1996, the Operating Partnership also had $25
million of unused borrowing capacity under its revolving credit facility. The
Partnership believes that such sources of funds will be adequate to meet the
Partnership's working capital needs, make quarterly distributions to Partners
and fund the Partnership's capital expenditures for at least the next twelve
months.

     Quarterly distributions to the Partners of TNCLP are based on Available
Cash for the quarter as defined in the Agreement of Limited Partnership of
TNCLP. Available Cash is defined generally as all cash receipts less all cash
disbursements, adjusted for changes in certain reserves established as the
General Partner determines in its reasonable discretion to be necessary.
Available Cash for the nine months ended September 30, 1996 increased $55.7
million over the nine months ended September 30, 1995 due primarily to the
repayment of its $35 million term loan during the 1995 period, proceeds from the
accounts receivable securitization facility and higher net income in 1996. On
October 21, 1996, the General Partner announced a cash distribution of $24.1
million ($1.77 per Unit) to holders of the SPUs of record as of November 6,
1996, payable on November 27, 1996, based on Available Cash for the quarter
ended September 30, 1996. A cash distribution of $9.2 million ($1.77 per Unit)
on the Common Units, and a cash distribution of $15.7 million to the General
Partner based on Available Cash for the quarter ended September 30, 1996, were
also declared. There were no accumulated distribution arrearages for any Units
as of September 30, 1996. At September 30, 1996, the Reserve Amount remained
fully funded. During the first nine months of 1996, the Partnership paid $171.3
million in distributions to its Partners.

     Accounts receivable declined $19.9 million from the December 31, 1995
balance due to the accounts receivable securitization facility entered into in
the third quarter of 1996.
 
     Customer prepayments declined $13.1 million from the December 31, 1995
balance due to the normal seasonal drawdown by customers of product purchased in
prior periods. Certain customers prepay for product



<PAGE>

during the fall and winter months to take advantage of favorable pricing
conditions. The customers then take delivery of the product as needed during the
spring planting season.


CAPITAL EXPENDITURES

     Capital expenditures totaled $5.8 million for the first nine months of
1996. In the remainder of 1996, the Partnership plans to spend approximately
$4.0 million.

ENVIRONMENTAL MATTERS

     The Partnership is subject to federal, state and local environmental,
health and safety laws and regulations, particularly relating to air and water
quality. In the course of its ordinary operations, the Partnership has and will
generate wastes which may fall within the definition of "hazardous substances"
under federal or state laws. The Partnership's production facilities and storage
locations require ongoing operating expenditures in order to remain in
compliance with environmental regulations. These operating costs consist largely
of such items as electrical and chemical usage, waste disposal, laboratory
analysis, fees for outside consultants and contractors, and salaries for
environmental employees.

     Based on its current knowledge, the Partnership does not expect capital
expenditures relating to environmental matters to have a material adverse effect
on its results of operations, financial condition, capital resources, liquidity
or cash flow. Based on information presently available, the Partnership does not
expect that any further material capital expenditures will be required to comply
with existing environmental regulations. Based on such regulations, the
Partnership does not believe that it will be required to make any material
environmental remediation expenditures in the foreseeable future.



<PAGE>

                          PART II.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)  Exhibits:
 
               10.54 - Consent and Amendment No. 2 dated as of July 31, 1996 to
                       Amended and Restated Credit Agreement, filed as Exhibit
                       4.5 to the Terra Industries Inc. Form 10-Q for the period
                       ended September 30, 1996 (File No. 1-8520), is
                       incorporated herein by reference.

               10.55 - Receivables Purchase Agreement dated as of August 20,
                       1996 among Terra Funding Corporation, Terra Capital,
                       Inc., Certain Financial Institutions and Bank of America
                       National Trust and Savings Association, filed as Exhibit
                       10.12 to the Terra Industries Inc. Form 10-Q for the
                       period ended September 30, 1996 (File No. 1-8520), is
                       incorporated herein by reference.

               10.56 - Purchase and Sale Agreement dated as of August 20, 1996
                       among Terra International, Inc., Terra Nitrogen, Limited
                       Partnership, Beaumont Methanol, Limited Partnership,
                       Terra Funding Corporation and Terra Capital, Inc., filed
                       as Exhibit 10.13 to the Terra Industries Inc. Form 10-Q
                       for the period ended September 30, 1996 (File No. 
                       1-8520), is incorporated herein by reference.


                  27 - Financial Data Schedule. (EDGAR  only)

      (b)  Reports on Form 8-K:
 
                  None.


                                   SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                           TERRA NITROGEN COMPANY, L.P.


                                      By:  TERRA NITROGEN CORPORATION
                                           as General Partner


                                      By:  /s/ Erik L. Slockers
                                           -------------------------------------
                                           Erik L. Slockers
                                           Vice President, Controller
                                           (Principal Accounting Officer)



Date:  November 14, 1996